Stimulus: Who Should Get a Rebate?

With stock markets around the world sucking wind, and the Federal Reserve approving a stunning emergency interest rate cut of 75 basis points to try to forestall a Wall Street plunge, there no doubt that Washington policymakers will jump into the fray with a fiscal stimulus of their own.

I remain skeptical on both the need for a classic Keynesian stimulus and its probable benefits. My concerns notwithstanding, a fiscal jolt is in the air. So, the question now is, what should it look like?

The Bush Administration and congressional Democrats agree that the centerpiece of any plan is likely to be an immediate tax cut aimed at spurring consumption. But a new analysis by my Tax Policy Center colleagues suggests that the design of these cash payments matters—a lot.

For example, the plan said to be favored by the White House would eliminate the 10% tax bracket for one year. This would have big impacts at both the top and the bottom of the income distribution. Because about 56 million families and individuals, including 33 million tax filers, pay no income tax, they'd get no tax cut.

By contrast, since upper-bracket taxpayers already pay the 10% rate (and more), most would get the full benefit of the proposal. Only those hit by the alternative minimum tax would not. So, an average taxpayer in the top 20% of earners would get about $1,213, while those in the lowest 20% would get $16. Middle income families would get a tax cut of about $688.

Now, take a variation on the rebate theme. This time, give every tax filer $600—couples would get $1,200 and each dependent would get $300. But reduce the size of the check for people earning roughly $100,000 and up. In this design, those making $10,000-a-year or less would get $313, those making $50,000–$75,000 would get about $1,100 and those making more than $1 million would get $19.

Leaving aside the question of why the government would waste money sending $19 checks to millionaires, the distribution of the rebate is important. Republicans will say it is class warfare, but in the case of stimulus, it really is not.

If you believe that the goal of fiscal pump-priming is to get money into the economy quickly, you need to target it carefully. And the evidence is pretty strong (though not conclusive) that lower income families are far more likely to consume their windfall than wealthy people, who may put in the bank.

Can we spend our way out of this slump? Since structural problems remain unresolved and a growing share of what we consume is produced overseas, I am not so sure. But that's another story. If we want to try, we need to give the cash to those who will buy.

Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.